US$7b worth of China bond sales delayed amid cash crunch

Domestic debt sales drop 42 per cent this month with treasurers cautious despite reassurances

PUBLISHED : Friday, 28 June, 2013, 12:00am
UPDATED : Friday, 28 June, 2013, 4:49am

The equivalent of about US$7 billion in yuan bond sales have been postponed during the mainland's two-week cash crunch, and treasurers say they remain cautious despite reassurances from the central bank that the squeeze is temporary.

Domestic debt sales dropped 42 per cent this month to 179.4 billion yuan (HK$225 billion), poised for the worst month since January last year.

At least 22 firms, including China Development Bank, cancelled or delayed sales. The yield on one-year AAA-rated corporate debt surged 124 basis points this month, the most in Chinabond data going back to 2006, to 5.183 per cent on Wednesday.

Beijing's unexpected clampdown on excessive short-term borrowing sent the overnight repurchase rate to a record 13.91 per cent last week, forcing policymakers to inject fresh funds to stem the turmoil. Companies from Baoshan Iron & Steel (Baosteel) to Aluminum Corp of China (Chalco) say they are reviewing financing options, amid concern the cash crunch could worsen a slowdown in the world's second-biggest economy.

"The corporate bond market is essentially shut," said Michael Shaoul, the chairman of Marketfield Asset Management in New York. "The corporate bond market and the banking system and the housing market, that's really where the stakes are high in China, and when a central bank starts to address excess credit creation, it's always the sectors which have done the best which suffer the most."

Chalco may "moderately increase dollar financing to help lower costs" and explore equity financing options, the firm said in an e-mailed response to questions last week.

It also reiterated plans to sell US$1 billion of perpetual notes overseas, a move approved by the board last month.

Baosteel's chief financial officer, Zhu Kebing, said that while finances had not been "infected" so far, "with the credit tightening and uncertainties on monetary policies, we will adjust our financing methods accordingly".

Higher yuan interest rates may also prompt the Chinese steelmaker to increase US dollar-denominated loans, Zhu said.

"The liquidity drought has hit the economy," said Shao Jiamin, the Shanghai-based head of fixed-income at HFT Investment Management. "The situation is going to last for a while, because the central bank is determined to improve or even eliminate companies with unhealthy balance sheets or cash flows."